What You Need to Know About Crowdfunding Right Now

Once a niche funding source for personal projects and products no consumer would ever want to buy, crowdfunding has evolved into a legitimate, common form of capital for startups and innovative businesses.

Want proof? Look no further than the agenda of the second annual Canadian Crowdfunding Summit, held at the MaRS Discovery District on March 3, 2016. Panelists and speakers at the event, hosted by the National Crowdfunding Association of Canada (NCFA), included a who’s-who of Canadian and international entrepreneurs and experts. And Ontario Finance Minister Charles Sousa was on hand to open the conference.

“The future of crowdfunding is now,” believes NCFA Executive Director Craig Asano. Here are eight ways to take advantage of crowdfunding, courtesy of the entrepreneurs and experts who spoke at the Summit:

1. You need to do your homework

Raising capital from the crowd seems like a relatively straightforward process: shoot a video and start a campaign on Kickstarter or another platform, then sit back and watch the money roll in. If only it were that simple.

Before the Revol Technologies team put their custom-fit earphones on Indiegogo, they studied past successful crowdfunding campaigns. “I reached out to as many people who have done campaigns in the past [as possible] to get valuable information on the do’s and don’ts of their campaigns,” explains Dan Blumer, the co-founder and CEO of Montreal-based Revol. “So essentially taking the templates of others and doing them ourselves.”

It paid off, big time. Revol’s original goal was U.S.$100,000, but the campaign ended up raising U.S.$2,570,000, and the company has since made an additional six figures in pre-sales on Indiegogo.

2. You need to educate your angels

New regulations around equity crowdfunding allow companies in most parts of the country to tap retail investors for capital. But simply building the largest pool of civilian backers you can won’t lead to the best results. “It’s not sufficient to assume that just because they’re rich they’re necessarily going to be able to add value to the shareholders agreement [or] understand the down rounds [or] how to value a business notes Bill Morrow, CEO of Angels Den Funding Inc, a British platform founded in 2007.

The U.K. has had equity crowdfunding for several years now, and Morrow’s opening keynote at the Summit detailed what it takes for a country to make the financing model successful. “For Canada to actually be able to progress, you kind of need to have an education program for both entrepreneurs—Canada’s really good at that—but for the angels as well,” he told me.

For example, retail investors may not be familiar with the risk-reward calculations in niche or specialized industries. “The challenge for us is that as a research and development-oriented enterprise, the message can be complicated,” admits Buck Young, the co-founder and Operations Manager of CannTx Life Sciences, a medical marijuana company. “Our challenge will be to really simplify that and condense it.”

3. The fundamentals still matter

His main business is software, but Michael Hyatt also has a side-gig investing in startups as a Dragon on Next Gen Den, the online spinoff of the hit CBC entrepreneur pitch show. Hyatt says the same rules of success apply today as a decade or a century ago. “Great businesses show great value to clients and are something they really, really need,” he says.

One particularly important skill for entrepreneurs: the ability to pivot. “Do I like their market and do I think they can make it?” Hyatt says he asks when evaluating an investment opportunity. “And do I think they can pivot when one of the founders leaves or they lose funding or something else happens? Because inevitably it does.”

The same rules apply to investors looking to back a company through a crowdfunding platform, or to founders seeking capital via one.

4. You need to deliver

Plenty of companies have raised six or seven figures through crowdfunding campaigns, and then failed to meet their targets or deliver their products on schedule. Equity adds a whole different set of pressures to the mix, because those disappointed backers are now shareholders.

“I see a lot of companies raise millions of dollars for a really great product, [but] there’s a big difference between raising that money and then shipping that product and then getting acceptance,” says Hyatt.

Putting in the early work pays off. “The most successful campaigns are the ones that take the time to plan, [to] understand their consumer and the market and the community they’re trying to build, and then execute that plan,” says Daryl Hatton, founder and CEO of Vancouver-based crowdfunding platform FundRazr. “Otherwise they tend to fail rather quickly and rather embarrassingly.”

5. It’s not just for startups

While much of the conversation this year has been about the new equity crowdfunding regime, other forms of the financing model can and do exist. There is of course the original kind, where campaign backers on platforms like Kickstarter or FundRazr receive rewards in the form of experiences or physical goods in exchange for their money. But crowdfunding is also being applied to asset classes like debt and real estate.

The last of those categories has seen a particular proliferation of platforms and interest. “The predictability of cash flows, the ease of understanding and analyzing rent rolls, cash flows, [and] financial statements [make real estate] a lot more predictable compared to the other asset classes,” says Amar Nijjar, the founder and CEO of Tornto’s R2 Crowd.

6. There’s plenty of room for improvement

Crowdfunding has the potential to make entrepreneurship accessible to people and communities not served by traditional institutions or capital models. “We already know that the established financial system—whether it’s Wall Street or banks or Silicon Valley venture capital—is not reaching a lot of populations,” says Amy Cortese, the founder of Locavesting, a news source and resource site. “Rural entrepreneurs, often the LGBT community of social entrepreneurs—a lot of times these entrepreneurs are not getting the capital they need, either because they don’t fit the mold or they’re just underserved by the current financial system.”

But Cortese says that crowdfunding has so far failed to live up to its game-changing potential. “Right now, crowdfunding—especially equity crowdfunding—tends to be privileged people investing in other fairly privileged people,” she says. That needs to change. “Maybe we need stakeholders to step up in a community, whether that’s foundations or banks or a locally-based corporation, that can come in and match funds raised by the community in order to amplify the value of that,” she suggests. “And we’ve seen that working a little bit in Detroit—I think that’s a very promising model.”

7. It’s deal time

The new equity crowdfunding regulations and the nascent industry’s growing profile mean that much of the groundwork has already been laid. “Companies can go ahead and offer their securities online. The exemptions exist; the ecosystem is set up; the technology is there,” Jason Saltzman a partner at Dentons Canada LLP, which has helped portal operators with their launches. “Now we can get the deals done.”

8. The rules aren’t perfect—yet

The regulatory changes that took effect on January 25, 2016 apply to companies and investors in Ontario, Manitoba, Quebec, New Brunswick and Nova Scotia. British Columbia and Saskatchewan already had their own rules in place. “So across Canada we have three different crowdfunding rules, [and] there’s a fourth one contemplated by Alberta,” notes Peter-Paul Van Hoeken, founder and CEO of Canadian equity crowdfunding platform FrontFundr. “For young companies looking to raise capital across Canada, having to deal with all these different rules is not ideal—far from.”

For more insights from the 2016 Canadian Crowdfunding Summit, listen to this week’s BusinessCast by clicking the button above or download by clicking on the iTunes logo below: